Managing Beliefs about Monetary Policy under Discretion

Abstract

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Interest Rate Surprises: A Tale of Two Shocks

“…and Gürkaynak, Sack, and Swanson (2005c,b).18 These results are in line with the recent literature that argues for the importance of the information channel of monetary policy(Ellingsen and Soderstrom 2001;Tang 2015;Mertens 2016;Melosi 2017;Nakamura and Steinsson 2018;Lunsford 2020;Stavrakeva and Tang 2021…”

“…Barakchian and Crowe (2013) show evidence that the public can use FOMC policy actions to infer the Federal Reserve's private information. Ellingsen and Soderstrom (2001), Tang (2015), Mertens (2016), and Melosi (2017) provide theoretical models that explore the information channel (also referred to as the signaling channel). 6…”

Inferring monetary policy objectives with a partially observed state

“…On the one hand, a case can be made that households and firms observe economic fundamentals while the central bank only sees a particular set of aggregate indicators, which are polluted by noise that is unrelated to the fundamentals (e.g., Svensson and Woodford, 2004). On the other hand, the central bank has access to private information (e.g., internal forecasts) that the public can only imperfectly infer from observed policies (e.g., Mertens, 2010). We view symmetric information as a compromise between these two competing attitudes expressed in the literature.…”

Inflation expectations and nonlinearities in the Phillips curve

“…Asymmetries in the transmission of monetary policy and their consequences are examined inSchaling (2004) andSantoro et al (2014).5 The literature emphasizing survey measures of inflation expectations includesLeduc et al (2007),Adam and Padula (2011),Chan et al (2018),Coibion et al (2018), andRoberts (2022), among many others, with some papers emphasizing robust deviations from rationality (e.g.,Andrade & Le Bihan, 2013;Binder, 2017;Bordalo et al, 2020;Ehrmann et al, 2017;Fuhrer, 2018;Pfajfar & Santoro, 2013). On the theoretical side, a closely related literature focuses on beliefs in macro models (e.g.,Gerko, 2018;Mertens, 2016).6 Popular explanations of the macroeconomic dynamics of that time include, among many others, a policy-regime change(Blanchard, 1984;Clarida et al, 2000), changes in NAIRU and real-time measurement issues(Ball, 1997;Orphanides, 2001), supply-side shifters(Barsky & Kilian, 2002;Blinder & Rudd, 2013), rising disagreement in inflation forecasts(Mankiw et al, 2004), and the evolution of policymakers' beliefs(Primiceri, 2006) Erceg and Levin (2003),Goodfriend and King (2005),Bordo et al (2007),. andNunes (2009) also examine these issues.7 We do not impose the constraint that 𝜇 = 0, because our focus is on the empirical relationship between inflation and unemployment.…”